Question
Nicks Novelties, Inc., is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $300,000,
Nicks Novelties, Inc., is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $300,000, have an eight-year useful life, and have a total salvage value of $20,000. The company estimates that annual revenues and expenses associated with the games would be as follows: Revenues $ 200,000 Less operating expenses: Commissions to amusement houses $100,000 Insurance 7,000 Depreciation 35,000 Maintenance 18,000......160,000 Net operating income $40,000 1. Assume that Nick's Novelties, Inc., will not purchase new games unless they provide a payback period of five years or less. Would the company purchase the new games? 2. Compute the simple rate of return promised by the games. If the company requires a single rate of return of at least 12%, will the games be purchased?
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